In chapter 13, the debtor pays the unsecured creditors a percentage of what is owed, over a period of either 36 or 60 months. The length of the plan is primarily a function of how much the debtor has available based on projections included in papers submitted in the case. Under some circumstances, it may be advisable for the debtor not to pay a percentage of what is owed, but instead pay 100% of what is owed.
Let’s say a debtor owns a residence presently worth $300,000. And let’s say there is one mortgage loan against the property, with a balance of $310,000. And let’s further say that the debtor has borrowed heavily on credit cards, and has $75,000 in credit-card debt.
It is not uncommon for banks to charge 18% interest on credit card balances. On a total balance of $75,000, the interest alone would be over $1,000 per month, or $12,000 per year. Let’s assume the debtor is making more than $100,000 per year. And let’s assume that with that amount of income the debtor is ineligible to file chapter 7.
The debtor wants to keep the residence. The debtor is confident that in the absence of payments on the credit cards, he would be in a position to make the monthly mortgage payments. The continuing accumulation of high amounts of interest on the credit cards is putting the debtor in a position where he has to choose between paying the credit cards or paying the mortgage. However, he can’t just go into chapter 7 and discharge the credit cards. That’s where the chapter 13 100% plan comes in.
The debtor would submit a plan in Chapter 13 to pay all of his credit card debt over 5 years, at 0% interest. Paying 1/60th of the principal balance on the cards leaves the debtor with sufficient funds to make the monthly mortgage payments and keep the house. Whereas, if the interest were to continue to run, the total of the monthly payments on the credit cards plus the monthly payments on the mortgage would cause the debtor to default on either the credit cards or the mortgage.
During the five-year period, the debtor must remain current with his mortgage payments, and must also religiously make the plan payments on the credit cards. If he does so, after five years he will receive a discharge of the credit card debt (meaning the interest which would have otherwise been payable during the five years). The case is then closed, and the debtor is out of bankruptcy, left only with his mortgage payments.
This is not an every day scenario for chapter 13 bankruptcy. However, this type of plan is proposed from time to time. As can be seen, it would be a good plan for someone in these circumstances.